California and the West

Solid Boeing Profit Masks Uneasiness

Wall Street is concerned that the company will suffer as spending on new Pentagon programs is ratcheted down.

Boeing Co. said Wednesday that its third-quarter profit more than doubled, mainly because of a large tax benefit and the sale of its Rocketdyne unit in Canoga Park.

But the profit jump masked the first sign of a slowdown in its defense business, plus a larger-than-expected charge from a strike that halted commercial aircraft production for a month.

Shares of Boeing fell $1.87 to $65.10. Trading volume was three times heavier than normal.

"The major disappointment was the substantial drop in defense revenues," said Paul Nisbet, an aerospace analyst with JSA Research Inc. "Wall Street is getting antsy about potential cuts in big defense programs."

After fueling much of Boeing's growth over the last four years, defense revenue is expected to moderate as the Pentagon weighs scaling back spending amid the mounting costs of operations in Iraq and Afghanistan. Pentagon spending is expected to increase by only 2% to 4% a year during the next five years after growing about 11% annually since 2000.

Any slowdown will hurt Chicago-based Boeing, the largest private employer in Southern California with about 32,000 people, most of whom work in defense-related businesses.

Boeing's overall defense revenue fell 11% in the third quarter, mainly reflecting lower sales on a secret spy satellite program. A major portion of the work on the program, which has encountered significant cost overruns and delays, is being transferred to Lockheed Martin Corp.

Boeing acknowledged for the first time Wednesday in a filing with the Securities and Exchange Commission that it had received a partial stop-work order from the National Reconnaissance Office for the classified satellite program called future imagery architecture. Boeing said the order "makes it probable that our scope of work will be reduced" on the project and that the anticipated loss could be "less than 2%," or $1.2 billion, of the company's projected $62 billion in revenue next year.

Military sales fell because of fewer deliveries of C-17 cargo planes, which are assembled in Long Beach. It delivered three C-17s to the Air Force in the quarter instead of the usual five because of seasonal schedule changes.

Boeing booked a pretax gain of $573 million from the sale of Rocketdyne. But excluding that, its defense unit posted $730 million in operating earnings in the quarter, down 10.5% from $816 million a year earlier.

James Albaugh, president of Boeing's Integrated Defense Systems, said the company expected to return to posting "strong" operating earnings in the fourth quarter.

"We still have the industry leading backlog at well over $78 billion," Albaugh said, adding that foreign sales of military fighters and electronics should also help buttress any slowdown in Pentagon spending. He expects foreign sales to more than double from about 7% of its defense unit's revenue to 15% during the next five years.

Chief Executive W. James McNerney said that Boeing was enjoying "tremendous sales success" with commercial aircraft orders as it moves closer to the 2008 debut of the 787 Dreamliner. It has 194 firm orders for the 787.

Boeing's third-quarter net income rose to $1.01 billion, or $1.26 a share, compared with $456 million, or 56 cents a share in the year-earlier period. Revenue slumped 4% to $12.63 billion from $13.15 billion.

During the quarter there was a strike by workers at its commercial aircraft plants in the Seattle area. As a result, Boeing delivered 21 fewer aircraft in the quarter and it reduced earnings by 25 cents to 30 cents a share, far more than the 9 cents that some analysts were expecting.

The strike also dampened what was expected to be a stellar year for the commercial aircraft unit, which had been winning large orders and anticipated delivering 320 jetliners this year. It now expects to deliver 290 planes this year.

Still, Boeing raised its earnings forecast for 2006 by 10 cents to between $3.10 and $3.30 a share, saying it expected higher commercial aircraft deliveries to help offset reduced Pentagon revenue.